Rates will be cut… but how far?

After a volatile summer, the financial markets are surfing a wave of bond rally in flight-to-quality regime based on expectations of the Fed’s rate cuts. However, given the current pricing that seems overly aggressive, this rally could turn into a storm. Indeed, the markets are currently anticipating three cuts in the Fed Funds rate (including one of 50 bps) before the end of the year (112 bps of decline in total) while we expect only two of 25 bps. The publication of inflation figures next week could change the situation while the US NFP employment report confirmed the trend of a gradual weakening. Meanwhile, on the ECB side, we are currently aligned with the market on two 25 bps rate cuts expected in 2024. The C. Gouv meeting on September 12 would thus be another major event to follow in the coming week. If the announcement of a rate cut seems to be a done deal, the future path of rates remains more uncertain and data-dependent, as the ECB faces both a weak economic outlook for the euro area and the stickiness of services prices. A gradual approach with a cut per quarter, at least until March 2025, seems thus more likely.